ANNUAL REPORT 2010 - Piscataqua Savings Bank

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Piscataqua Savings Bank again remained in the forefront of Portsmouth’s banking community. During 2010 we developed many new customer relationships as a result of referrals by existing customers, an ongoing recognition of the Bank’s important role as a respected corporate citizen in the Portsmouth community, and continued dissatisfaction with large institutions. Our lending staff originated a volume of mortgages surpassed only by the year prior. We refinanced mortgages for many new customers and maintained a very strong market share for mortgaging home purchases in the Seacoast. Our trust department staff successfully established almost $20 million in new accounts achieving a new record for market value of $166.7 million.

The Bank’s performance and accomplishments during 2010 were truly outstanding. I hope you will take the opportunity to read the following summaries by our Bank’s senior officers of the positive results we experienced in each of their respective areas.

Financial Results

Joan W. Gile, Senior Vice President/Operations

Balance Sheet:

In 2010, total assets increased by over $14.5 million when compared with year-end 2009. The loan portfolio increased by $760 thousand on a net basis, excluding the reserve for loan losses. Total deposits increased by $13.2 million from year-end 2009. The securities portfolio increased by $15.8 million and cash and cash equivalents decreased by $1.9 million from year-end 2009.

Capital levels increased over 2009 year-end levels with the addition of 2010’s year-end earnings. The Bank’s capital ratio of 16.03% remains one of the strongest in the State of New Hampshire. As a mutual bank we do not have the same obligation as a stock-owned bank to provide a return to stockholders; but rather, we can utilize this strong capital position to support our business model of remaining a very personal bank gearing our services exclusively to local individuals and families.


Interest income in 2010 was slightly lower than 2009 by $575 thousand. Net Interest Income surpassed 2009’s level by $91 thousand. The Bank was able to accomplish this, as interest expense decreased by $667 thousand.

Non-interest income in 2010 was $351 thousand above 2009 year-end levels. This is mainly due to the Trust Department growing their assets managed and a significant increase in the number of fixed rate loans sold on the secondary market.

Non-interest expense increased from $5.3 million in 2009 to $5.5 million in 2010. Salaries and employee benefits experienced a minimal increase from 2009 levels. The remainder of the increase was in occupancy and equipment expense.

After-tax net profit increased from $1.09 million in 2009 to $1.37 million in 2010. The level of earnings continues to adequately support asset growth and maintain a strong capital position.

Included in this report is a graph showing the trend of the Bank’s net income and its efficiency ratio. The efficiency ratio is the measurement of what it costs for each dollar the institution makes. The Bank’s ratio for 2010 was 72.72% meaning it costs the Bank $0.723 for each dollar of income that it makes. The ratio in 2009 was 75.21%. This metric is of key importance to the Bank and one from which the Bank benefits by having its single office location and having a relatively small staff.

Lending Results

Richard M. Wallis, Executive Vice President/Senior Loan Officer

Mortgage loan activity was buoyed in 2010 by some improvement in the local real estate market. According to Northern New England Real Estate Network, Rockingham County experienced slightly higher residential real estate sales with 2,417 sales in 2010 up from 2,292 in 2009, or a 1.05% increase. In addition to the higher sales volume the median sales price of a residential home increased from $257,950 in 2009 to $266,900 in 2010. These slight improvements are indicative of a slowly recovering economy.

Piscataqua Saving Bank’s loan volume compared favorably to that of other lenders. According to Real Data Corporation, Piscataqua Savings Bank was the fifth highest mortgage volume lender in the market area made up of eight surrounding communities (Greenland, Hampton, North Hampton, New Castle, Newington, Portsmouth, Rye and Stratham). This volume represented a 3.2% share of the market and was an improvement over 2009 when the Bank’s market share was 2.77%.

Mortgage interest rates declined by .75% from April through October 2010 on 30 year fixed-rate mortgages. This sharp decline in rates created an opportunity for homeowners to refinance their mortgages and enabled our loan department to originate $77.6 million in mortgage loans, which was its second highest origination volume in history, 2009 being the first with $80.6 million. Despite this high volume of lending the net gain in the portfolio was only $760 thousand due to a high level of payoffs often experienced during a refinance market.

Although there are signs of improvement in the real estate market, there continues to be a cloud hanging over the market which will impede a quick recovery. The number of foreclosures throughout the state increased in 2010 by 14% according to data provided by New Hampshire Housing Finance Authority. This increase was in spite of a moratorium on foreclosures by several larger national lenders during the last quarter of 2010. A bellwether for future foreclosure activity is the increased number of foreclosure auction notices (6.3%) posted during the final quarter of 2010. In 2010 Piscataqua Savings Bank conducted its first foreclosure in almost two decades; however, the Bank did not experience a loss.

Nationally, the residential mortgage delinquency rate (those mortgages thirty days or more past due) for banks declined from 10.98% in 2009 to 10.57% in 2010. Piscataqua Savings Bank’s delinquency rate increased from 1.24% to 1.42% during the same time period. This continued low delinquency rate is a reflection of sound underwriting practices that the Bank has maintained during both good times and bad. Borrowers value and appreciate the experience and advice that our Loan Department staff provides.

“Regulatory Environment”

Debra S. Perry, Vice President/Loan Officer

Since the 1930’s banks have had legislative and regulatory changes that impacted the way they do business. The financial crisis from 2008 to the present is considered by many economists to be the worst financial disaster since the Great Depression. Until this period, legislative and regulatory changes came in relatively manageable increments. Since 2007, there have been waves of regulatory changes that have significantly impacted the banking industry. The biggest of them all is the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted on July 21, 2010. The Act contains over 2,300 pages and represents the longest and most sweeping regulatory legislation ever adopted. Dodd-Frank is intended to reform mortgage lending and, in particular, protect consumers that can’t afford to borrow from predatory lenders. Most of the impact on the Bank will occur over the course of the next few years when what is estimated as hundreds of regulatory rules will be promulgated.

The Act creates a new Consumer Financial Protection Bureau (CFPB) that will have supreme responsibility for establishing most of the consumer protection regulations in the future. The CFPB opens for business on July 21, 2011 and will be an independent agency with the power to assess civil money penalties for violations of federal consumer financial laws.

While Dodd-Frank will affect many areas of our daily operations, its most significant impact will occur in the loan department. One major change is the required registration and fingerprinting of our Loan Officers with the new National Mortgage Licensing System Registry (NMLS), a requirement under the Secure and Fair Enforcement for Mortgage Licensing Act (S.A.F.E. Act). This will provide each of our Loan Officers with a unique identifier number that is registered with the NMLS and will remain with that individual, regardless of changes in employment, and must be provided to consumers. Other changes (some proposed, some already in effect) include numerous changes to many of the required disclosure documents that we give to our borrowers, new appraisal rules, more collection of data from borrowers so that regulators can scrutinize our practices for potential Fair Lending violations, and the reclassification of our mortgage products. Collectively, these changes could very much limit the Bank’s variety of offerings for the consumer.

We are vigilantly monitoring and evaluating all of the regulatory changes. Our staff has been attending numerous compliance association meetings, seminars and webinars on the changes as they are rolled out. The total cost and impact of these regulatory changes to the Bank is still unknown.

Deposit Operations and Compliance Results

Joan W. Gile, Senior Vice President/Operations

The Bank continues to attract new customers as people are increasingly more aware of the benefits of doing business with locally owned and operated organizations. Our mission and values clearly state our commitment to the community and our mutual form of ownership enables us to make decisions in the best interest of the customers. We welcomed over 450 new customers to Piscataqua Savings Bank during the year.

A recent Federal Reserve Bank payments study found that there were 20 million more electronic payments made in 2009 than in 2006. Automated Clearing House (ACH, or more commonly known as direct deposit) payments grew from 14.6 billion to 19.1 billion. Debit card usage now exceeds all other forms of non-cash payments while credit card use has decreased by 63%. Piscataqua Savings Bank has experienced the same trends. In 2010 we processed a total of 306,438 ATM and debit card transactions. This was a 12% increase from 2009. We also processed 125,000 ACH transactions. Due to the shift to electronic payments, the day to day traffic at the teller line has decreased and shifted the way we deliver support to our customers. In 2010 we made changes that focused on enhancing the customer experience.

Last year we added another position to our Customer Service Department. We now have a third customer service representative available to assist customers who enter the Bank via the entrance from the parking lot. This individual also helps ensure telephone calls are answered quickly and routed efficiently. When calling the Bank between the hours of 8:30 am – 5:00 pm, a customer service representative will always be available to take your call directly without having to go through a maze of automated options.

Online banking customers have experienced a new and improved bill payment product. This new system has many features and functions to make bill paying very quick and easy. There are over 400 billers that will allow customers to receive and view their bills, and make payments electronically. Customers can now see eighteen months of payment history for each of their billers. There is also a “person to person” feature that allows customers to pay any individual electronically regardless of where they bank. We are very excited about this improved service and customers are enjoying the new features.

Piscataqua Savings Bank continues to support the educational efforts of its employees. In October Finance Administrator, Kate McManus, attended the Northern New England School of Banking. This program provides an introduction to bank management and is an excellent opportunity to provide career development for the employee while enhancing the Bank’s ability to provide quality, knowledgeable service to the customer. On June 13, Assistant Vice President/Information Technology Officer, Antone Cabral, completed his final week of study at the New England School for Financial Studies. This year-long program prepares banking professionals with the tools needed to manage effectively and trains them to make decisions that promote the profitability of the bank. Tony worked very hard completing four written assignments over the twelve month course of study. Many other employees attended more than 80 seminars, webinars and online classes to enhance their knowledge of banking products, procedures and regulatory requirements.

Trust/Investment Management Results

Richard G. Kaiser, Vice President/Senior Trust Officer

The Trust Department had a good year for 2010, due in part, to the development of new and sizable trust relationships and global financial markets delivering positive returns for the second year in a row. 2010 can be defined, unlike the preceding year, by several risk on/risk off environments which increased market volatility and heightened investor sensitivity. During the first quarter of the year, investors’ comfort level in the global economic recovery remained high and financial markets rallied with the strongest gains registered in riskier assets such as high yield bonds, and emerging market debt. As mid-year approached the potential impact of the European sovereign debt crisis on the banking industry and the potential for a double-dip global recession rattled markets in the second quarter. Investors sought the safety of U.S. Treasuries and gold as they shunned global equities, commodities and real estate. During the second half of the year emergency liquidity and bailout funding measures in Europe and renewed quantitative easing (QE2) in the United States eased investors minds and the markets responded positively with equity markets, global real estate and commodities rising more than 20% during the second half of 2010. Global equity markets rose 12.7% as measured by the MSCI ACWI Index and emerging market equities were a significant contributor to global equity performance due to strong demand for commodities, robust infrastructure build-out and positive economic fundamentals compared with many developed nations. Domestically, the Dow Jones Industrial Average returned 14.05% vs. the Standard & Poor’s Index at 15.06% and the NASDAQ at 18.15%. In the fixed income markets, Treasuries posted gains of 9.4% for the year despite an increase in long-term rates near the end of 2010 due to heightened inflation concerns and anxiety regarding the U.S. budget deficit and debt levels. As in the previous year, the best returns came from longer maturity and lower quality issues with commercial mortgage backed assets returning 20.4% and corporate high yield bonds (junk bonds) returning 15.1%.

The market’s positive performance plus the Department’s ongoing new business development propelled the Trust Department’s total market value again to an all time high at $166.7 million, an increase of $12.58 million or 8.16% from the beginning of the year. Market value appreciation attributed $3.6 million or 28.7% of this increase and net new business development of $8.98 million or 71.3% comprised the balance. During the past year, we made a concerted effort to increase the total of assets under management without significantly increasing the total number of managed accounts. At year-end the total number of Trust Department managed accounts grew to 377 from 374 last year. New business developed for 2010 was $19.5 million, $6.9 million over budget for the year, but $2.6 million less than 2009. Net new business, after distributions and terminating accounts, was at $9.0 million compared with $14.5 million last year. We saw strong new business growth from our existing client base as well developing new relationships from qualified referrals received from Bank and Trust clients, Trustees and Corporators, bank officers and staff as well as local attorneys, CPA’s and other professionals. Many new clients came on board because they desired to have their assets managed locally while other existing clients consolidated their assets and Bank accounts and put them under “one roof” for investment management and estate planning purposes. The average size account increased to $442,000 at the end of December from $412,000 a year ago. The composition of the Department continued to be consistent from last year with personal trusts and estates comprising 38% of our account base, IRA rollover accounts at 14% and investment management agencies for individuals and charitable organizations at 44% and custodial relationships at 4%.

The Trust Department’s escalating market value positively impacted revenue for the year. Total revenue received was $1.24 million, $112,695 or 10.02% over last year. Trust Department expenses increased by 5.57% to $1.04 million from $988,677 last year, resulting in a net after-tax profit of $126,874, $36,837 or 40.91% greater than 2009.

During the year, we began to migrate our administrative and operational functions to a new online real time platform called Charlotte Front Office which was developed by our trust accounting provider SunGard systems. We anticipate that the total process will be finalized during the late fall of 2011. Also, during 2010 we offered our clients the ability to view their statements, account holdings and transactions online through Portfolio Access Link (PAL). We find that senior clients still prefer to receive paper statements while our younger clients prefer the paperless “virtual” environment which gives them the ability to review their accounts daily from anywhere where there is internet capability.

While contracts for our trust systems, i.e. trust accounting, custody, security clearing, tax service and investment data service remain in place for several years, we continue to scrutinize new programs which can be integrated with these platforms to create improved productivity and lower costs. During 2011 we will be reviewing a new trading order management platform for equities and mutual funds and a platform for developing comprehensive financial and investment planning models for clients and prospects.

As we look toward 2011 in the Trust and Wealth Management arena, we were relieved by the passage of The Tax Relief, Unemployment, Insurance Reauthorization and Job Creation Act of 2010 (The 2010 Tax Act) in mid December. This act kept intact the Bush-era income tax rates and tax breaks for all wage earners for two years. Additionally, it makes dramatic changes to the estate, gift and generation skipping (wealth transfer) taxes as the amount that can be inherited free of federal estate tax was increased to $5 million ($10 million per married couple) with a flat 35% tax rate above the exemption amount. The Tax Act also included provisions for the portability of the exemption allowing a surviving spouse to use the deceased spouse’s unused estate tax exemption; and, the gift and generation skipping taxes were increased to equal the estate tax exemption of $5 million. However, the annual gift exclusion did not change and remains at $13,000 per year.

In recent years the State of New Hampshire has significantly modernized its Trust laws to become one of the most progressive states and has become a leading jurisdiction for Trusts. Currently, there is a Senate bill in committee (SB50) which, if passed, will continue to uniquely position New Hampshire as one of the most attractive legal and financial environments for individuals and families seeking to establish and locate their trusts and investment assets here. This is very encouraging as we have recently received several very large family relationships that have moved their Trust relationships and banking business to New Hampshire and have named the Bank as their successor Trustee.

As the Trust department grows, we a have great need to expand our office space to accommodate that growth. During 2011 the Bank will be renovating the third floor space (currently over the Trust Department) which will house Trust Operations and Trust Investments. No time schedule has been finalized yet. Additionally, along with expanded office space, we will be looking to adding to staff in the areas of administration and new business development to take further advantage of and be a beneficiary of New Hampshire’s favorable Trust and Wealth Management environment.

What’s Ahead?

Small community banks will face considerable challenges in the years ahead. Margins will be tighter. Even now, a realistic return on assets for a mutual bank is 50 to 75 basis points (or ½% to ¾%) on total assets; whereas, not too many years ago the standard was typically 100 basis points (1.0%) on assets. For a mutual bank, earnings are the primary source for building and maintaining capital. While increased regulations will further squeeze smaller banks’ earnings, larger institutions will absorb much of the regulatory expense through their economies of scale.

The opportunities, however, for Piscataqua Savings Bank will be equally great. The Bank’s customers are loyal supporters of the Bank and appreciate the Bank’s commitment to the community. The Bank’s small size positions us to be responsive and to serve our customers in a very personal manner. Continual expanded use of technology will allow us to efficiently deliver services to meet the changing needs of our market.

Our goal continues to be the same. Conduct business based upon strong values, keep a focus on providing exceptional service to our customers, and keep our business truly local so that we can have a very positive impact on the level of service we provide.

Jay S. Gibson, President/CEO

Jay S. Gibson